On 2 April, President Trump announced his US reciprocal tariff plans under the International Emergency Economic Powers Act. What this essentially means is a 10% tariff on all countries – including the UK, effective as of 5 April. Higher tariff rates have been slapped on nations that have larger trade deficits with the US, and these will take effect on 9 April.
China, for example, will be charged a rate of 34%. … and that’s on top of the 20% tariffs imposed earlier this year. Trump is even threatening an additional 50% if Beijing does not withdraw its 34% retaliatory tariffs in Washington. This could leave some US companies bringing in certain goods from China facing a 104% tax. Other major trading partners, such as the EU, Vietnam and Japan, will be subject to tariff rates of 20% or more.
Two of the US’s largest trading partners, Canada and Mexico, were exempt from the reciprocal tariff announcement, however. But both Canada and Mexico will still be subject to tariffs on steel, aluminium and cars, along with all non-USMCA compliant goods. This represents a lower effective tariff rate than the 25% tariff on all Canadian and Mexican imports (10% on energy products) that was proposed earlier this year.
The markets’ response was near-instantaneous: almost US $5.0 trillion (£4.0 trillion) was wiped off the value of global stock markets in a “risk-off” fashion. This aggressive sell-off in the equity markets has continued over the past few days, while in the bond markets we have seen yields decline as investors have hurried back into “safe-haven” government bonds.
Numerous incidents over the past 40 years have triggered corrections in the stock markets. In 1987, for example, the federal government revealed a larger-than-expected trade deficit, and the dollar collapsed. In March 2002, the dotcom bubble burst when capital began to dry up. The world suffered a severe economic downturn between 2007 and 2009: the housing bubble burst, and the resulting crisis was fuelled by risky sub-prime mortgages combined and a lack of regulatory oversight. Five years ago, the start of the pandemic prompted a 34% decline in the S&P 500. But by the end of 2020, it had recovered, and even hit new highs.
All these crises saw the stock markets fall by a significant amount. The S&P 500 has recovered from each and every one of its downturns, eventually going on to record new all-time highs. It even recovered after the Great Depression of 1929 to 1941, the longest and deepest downturn in US history.
What makes the events of the last few days particularly remarkable is that they can be attributed to one man. Trump’s actions and the ongoing trade tensions that he has helped create could lead to higher consumer prices and are already creating economic instability the world over. Even the measured and usually restrained Sir Keir Starmer has commented that the new tariffs marked “the end of the world as we know it” in terms of global trade.
If Trump doesn’t pivot, the so-called stock market vigilantes will likely continue to obliterate more of the wealth of US citizens and its trade partners. Indeed, it is thought that many Americans have already called their congressional representatives to complain about this erosion of the value of their assets. Some Republicans are likely to join Democrats in an effort to reduce the power of the executive branch in setting tariffs. While the current federal laws governing tariffs give the President extremely broad powers over trade policy (specifically tariff rates), his current tariff proposals are likely to be challenged in courts. And if he isn’t careful, his accusers could ask the courts to contest the legitimacy of his motives for declaring a national emergency.
If he does end up being challenged in the courts, the impact of his tariffs could gradually decline. If that were to happen, the current market sell-off could easily reverse back to the upside.
The current fall in the markets, from Wall Street to Beijing, may feel dizzying. But drops of this nature have happened throughout history and having to withstand the pain of such falls is the price investors pay to secure the bigger returns over the longer term. Needless to say, it is hard to roll with the punches when your portfolios are plummeting; indeed, the likes of the S&P 500 and NASDAQ Composite have fallen into bear market territory since the beginning of this year. In fact, this is the sixth-worst start to a new year... ever.
In Europe, the European Central Bank is standing ready to pause interest rate cuts, given the uncertainty surrounding US trade policies and other important economic factors. Meanwhile, ECB President Christine Lagarde emphasised the need to remain vigilant on issues such as inflation. We need, she says, to become less reliant on US and Chinese technology. Tariffs, she believes, can only ever have a negative economic impact, and new investment opportunities must be created within the EU to boost economic growth.
The UK is likely to be less affected by US tariffs – and that’s not just because it was hit by a lower tariff rate than the EU. However, the impact of weaker US and European economies could be much more significant. That’s more likely to make life significantly harder for the UK Treasury by the time the Autumn Budget comes around. But the current economic backdrop might help to justify calls for further quarterly interest rate cuts from the Bank of England over the year.
Sir Keir Starmer has put a brave face on the US tariff announcements. The effects of the tariffs on UK GDP perhaps only amount to 0.2% or so – not enough to decisively change the outlook for UK growth. As for inflation, the fact that the government has not yet retaliated against the US tariff announcements means that the impact may well be minimal. It could even prove deflationary further down the line as economic growth cools.
Besides, there are some decent tailwinds driving UK growth this year, notably from government spending. But the tariffs might prove more problematic if the US and the eurozone were to fall into recession.
As for the investment fraternity, we must now wait to see how policymakers respond in numerous countries and trade blocs, including the European Union. While there is a willingness to negotiate, there is still hope that common sense might prevail and some of the tariffs might be reduced or done away with altogether.
Meanwhile, risk assets (equities) are still expected to remain under some pressure as economic uncertainty and volatility continue to depress the markets for a while longer.
This state of affairs will not last forever and a recovery will come about. Indeed, if we look back at the other half a dozen times double-digit losses were seen in a given calendar year, stock prices soon started to rise again once the market had found a bottom. And they actually went on to rally throughout the remainder of the year.
In three of the six cases, the gains were more than significant – twice in the 1930s and once five years ago (the pandemic). Of course, there are no guarantees that this will happen this time around – particularly with Trump in the White House. After all, the markets hate unpredictability.
As far as the world’s largest stock market – the New York Stock Exchange – is concerned, particularly the S&P 500, declines of at least 10% every year or so are normal. Market watchers and experts often view this as a culling of irrational exuberance or optimism that can otherwise get out-of-hand, driving stock prices to unsustainable levels.
The bull market of the past two and a half years has been driven by enthusiasm around artificial intelligence and the Magnificent Seven. This has propelled Wall Street to numerous new all-time highs throughout that period. Big Tech companies accounted for more than half of the S&P 500’s total returns last year. Many other sections of the market, however, have been less prosperous, which is why we believe that this recent destructive shake-out offers new investment opportunities, not only in the US, but in other regions of the world as well.
A market correction is an opportunity; a market downturn doesn’t necessarily bother us. What counts as an investor or a client is sticking to your investment plan so as to achieve your long-term goals. Emotional decision-making can be fatal. In these trying times, let’s be disciplined and maintain long-term perspectives, aligned with our long-term financial goals.
